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Demand Elasticity

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Demand Elasticity
ECON 1580 Unit 2 Written Assignment
University of the People
February 9, 2016

Suppose you are the manager of a restaurant that serves an average of 400 meals per day at an average price per meal of $20. On the basis of a survey, you have determined that reducing the price of an average meal to $18 would increase the quantity demanded to 450 per day.

1. Compute the price elasticity of demand between these two points. a. The price elasticity of the first two points ($20 @ 400 meals; $18 @ 450) is -1.117

2. Would you expect total revenues to rise or fall? Explain. b. The total revenue will rise because the demand is Price Elastic, meaning the absolute value of the demand elasticity is greater than 1. When demand is price elastic, a decrease in price will yield an increase in revenue.

3. Suppose you have reduced the average price of a meal to $18 and are considering a further reduction to $16. Another survey shows that the quantity demanded of meals will increase from 450 to 500 per day. Compute the price elasticity of demand between these two points. c. The price elasticity of the second two points ($18 @ 450 meals; $16 @ 500 meals) is -0.895

4. Would you expect total revenue to rise or fall as a result of this second price reduction? Explain. d. The total revenue will fall because the demand is Price Inelastic, meaning the absolute value of the demand elasticity is less than 1. When demand is price inelastic, a decrease in price will yield a decrease in revenue.

5. Compute total revenue at the three meal prices. Do these totals confirm your answers in questions 2 or 4? Average Meal Price | Meals Bought | Total Revenue | $20 | 400 | $8000 | $18 | 450 | $8100 | $16 | 500 | $8000 |

e. These totals represented in the graph above show that revenue peaks at $8100…...

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